On January 30, 2017, ESMA published its Opinion on the extent to which different types of units or shares (share classes) of the same Undertakings in Collective Investment in Transferable Securities fund should differ from one another. There is currently no common framework across the EU for share classes. Some member states prohibit the setup of different share classes within a single fund while others permit varying degrees of flexibility. Investors in a UCITS fund invest in a common pool of assets, individual share classes or sub-sets of investors can be attributed different rights although there is no legal segregation of assets between the share classes. ESMA sets out four high-level principles in its Opinion which apply when different share classes are set.
The first principle is the "common investment objective": share classes of the same fund should have a common investment objective reflected by a common pool of assets. ESMA is of the view that hedging arrangements at a share class level (with the exception of currency risk hedging) are not compatible with the requirement for a fund to have a common investment objective. The second principle is "non-contagion": UCITS management companies should implement appropriate procedures to minimize the risk that features specific to one share class could have a potentially adverse impact on other share classes of the same fund. The third principle is "pre-determination": all features of the share class should be pre-determined before it is set up. The fourth principle is "transparency": differences between share classes of the same fund should be disclosed to investors when they have a choice between two or more classes. ESMA acknowledges that its Opinion will have a significant impact on the investment fund markets in Member States where share class arrangements are allowed where those arrangements do not comply with the four principles.
Therefore, ESMA's view is that these share classes should be allowed to continue to operate but should be closed for investment by new investors by July 31, 2017 and for additional investment by existing investors by July 31, 2018.
The Opinion is available at: https://www.esma.europa.eu/press-news/esma-news/esma-advocates-common-principlessetting-share-classes-in-ucits-funds.
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